How Foreign Real Estate Property Is Taxed in the U.S.

One common misconception among Americans living abroad is that foreign income or property sales are automatically exempt from U.S. taxes. In reality, U.S. citizens and residents generally must report worldwide income to the IRS, including gains from selling real estate located overseas. Depending on the details of the sale, you may owe capital gains taxes in the United States, although foreign tax credits, exclusions and tax treaties can sometimes help reduce double taxation. These rules are intended to ensure foreign property transactions are taxed similarly to comparable transactions within the U.S.

If you have questions about selling property overseas or other international tax issues, a financial advisor can help you better understand the potential reporting and tax implications.

How the U.S. Taxes Global Income

Many countries omit global income from their tax base. In layman’s terms, this means that citizens of those countries don’t owe taxes when they make money abroad. 

The United States is one of the few countries that do tax global income. This is known as citizenship taxation, meaning taxation based on your citizenship. Residence taxation, on the other hand, means taxation based on your location. Citizenship taxation often leads to Americans receiving inaccurate tax advice, as foreign nationals and even (sometimes) accountants give advice based on their own nations’ residency rules. 

If, as an American, you make money while overseas, you will owe taxes on it. This includes any applicable income or profits from real estate in foreign countries.

Talk to a financial advisor about the implications of your overseas activities.

U.S. Citizens Owe Taxes on Property Sales at Home and Abroad

Real estate sales are taxed as capital gains if you held the property for more than a year. They are taxed at the same rate as regular income if you held it for less than 12 months. Profits from a property add to your taxable gains or income, while losses reduce from those gains or income.

Profit and loss are defined by the property’s underlying cost basis. This is defined as what you paid for the property, plus some applicable costs such as upgrades and renovations. Subtract the property’s cost basis from its sale price to determine your final profit or loss.

This is true no matter where in the world your property is located. Whether you sell property in New York, London or Dubai, you will owe capital gains or income taxes depending on the profits.  

You do receive a limited exemption for the sale of your primary residence. Individuals receive a $250,000 exemption while married couples receive a $500,000 exemption. You are not taxed on any profits within this exemption, and will owe taxes on any profits above that cap. This rule holds true if your primary residence is in a foreign country and you meet all of the requirements.

A financial advisor can help you figure out the best strategy for mitigating taxes.

Purchasing Property Overseas as an American

It is also common for foreign countries to restrict real estate ownership. This is particularly true in the case of commercial holdings or rental properties. In these cases, Americans may purchase properties through real estate trusts or other holding companies that own the properties on behalf of the American.

If you own a property through one of these entities, or if you own a share in one, the same rules apply. When you sell your interests in the trust or corporation, you must report the profits as a capital gain or income.

U.S. Citizens Owe Taxes on Income

The same taxation rules apply if you own income-generating property overseas. This is most common for people who own rental properties.

When a property generates income, you will add this money to your taxable income for the year. You can also deduct applicable costs associated with the property, reducing taxable income.

This is true regardless of the location of this property. In general, the rules are identical whether you own income-generating property in the U.S. or abroad. However, you will have to be aware of local laws regarding depreciation and other treatment of real estate taxes, as they may vary from U.S. standards.

In some cases, your taxes paid to a foreign government may help you qualify for a foreign tax credit in the U.S., reducing your taxable income or your tax liability. A financial advisor can help guide you through filing taxes on overseas activity.

Taxes Are Assessed in Dollars

Another discrepancy to account for is that American taxes are assessed in U.S. dollars. This is true regardless of the currency in which you received payment or the currency in which you hold money. This means that you must convert the value of sales and income into dollars for the purposes of your taxes. 

For capital gains, make this conversion as of the date of each transaction or tax event. This means that you record the cost basis of any asset in dollars as of the date of the purchase, transaction or step-up event. You record any change to this cost basis in dollars as of the date of the improvement, transaction or step-up event. And you calculate any profit or loss in dollars as of the date of the sale.

For example, say that John, an American, makes the following transactions:

• June 1, 2015: He purchases a property in Athens, Greece for 50,000 euros
• Oct. 7, 2018: He upgrades the kitchen in his property for 5,000 euros
• Feb 1, 2026: He sells the property for 80,000 euros

He would calculate his taxes as follows:

• June 1, 2015: Conversion rate 1 Euro/1.09 USD = $54,939
• Oct. 7, 2018: Conversion rate 1 Euro/1.17 USD = $5,855
• Feb. 1, 2026: Conversion rate 1 Euro/1.18 USD = $94,368 ¹

The cost basis of John’s property is $60,350 ($54,500 + $5,850) and he sold it for $94,400. He will owe long-term capital gains taxes on $34,050.

The same is true of income taxes. Workers who have an annual salary or wages may convert their annual pay as of when they pay their taxes. To do this, they will use the IRS’ average annual exchange rates.

Independent sources of income, such as that generated by privately owned real estate, must typically be calculated as of the time you received the payment. So, for example, if someone paid you 1,000 euros to rent your cottage for a week and you received that money on August 15, you would owe taxes based on the value of that payment in dollars on August 15. This can be difficult to track, and you may need to back-calculate payments if you didn’t convert them at the time, but it’s important to keep accurate records.

A financial advisor can help guide you through overseas transactions and their corresponding tax requirements in the U.S.

FBAR and FATCA Reporting for Foreign Property

Owning property overseas can trigger reporting obligations that go beyond simply calculating and paying capital gains tax. These requirements exist separately from your tax return, and missing them carries serious consequences even if you owed no additional tax at all.

The Report of Foreign Bank and Financial Accounts, commonly called an FBAR, applies to U.S. persons with foreign financial accounts whose combined value exceeds $10,000 at any point during the year. This isn’t limited to traditional bank accounts. If your foreign property is held through an entity that maintains its own account, for example, one used to collect rental income or manage property expenses, that account may count toward the FBAR threshold, even if you never personally deposited or withdrew funds from it.

A related but separate requirement comes from the Foreign Account Tax Compliance Act, or FATCA. Form 8938 applies to specified foreign financial assets and carries its own reporting thresholds, which differ from the FBAR’s and depend on factors like your filing status and whether you live in the U.S. or abroad. It’s possible to owe both an FBAR and a Form 8938 filing for the same underlying assets, since the two requirements come from different parts of the law and aren’t interchangeable.

Ownership structure adds another layer. As mentioned earlier, many Americans purchase foreign property through a trust, corporation, or partnership because of local restrictions on direct ownership. If you hold a significant interest in one of these foreign entities, additional forms, such as Form 5471 for foreign corporations or Form 8865 for foreign partnerships, may also be required, depending on your percentage of ownership and the entity’s classification.

What makes these filings particularly important is the penalty structure attached to them. Unlike a typical late tax payment, failing to file an FBAR or FATCA disclosure can result in steep penalties that apply regardless of whether any tax was actually due on the underlying assets. The reporting obligation exists independently of your tax liability, which means even someone who owes no additional U.S. tax on a foreign property sale can still face significant penalties for failing to disclose the associated foreign accounts or entities.

Given how easily these requirements can be overlooked, especially when property is held through a foreign entity rather than owned directly, this is an area where working with a tax professional experienced in international reporting is worth the cost, well before a sale or transaction triggers a filing deadline you didn’t know existed.

Bottom Line

For Americans, the taxes you owe on foreign real estate are largely identical to the taxes you owe on domestically held properties, but there may be different laws in the country your property is in which you must follow. Remember that you must calculate the value of any transaction in dollars as of each tax event to keep on top of your conversions. Additionally, you may be eligible for foreign tax credits in some cases depending on your overseas activity.

Foreign Investment Tips

• Investing abroad can be an adventure, but it can also be risky. If you’re interested in opportunities outside of the United States, a foreign portfolio can have some very real opportunities and advantages. 
• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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